Output falls as German industry suffers

German manufacturing, the locomotive of Europe's largest economy, is running out of steam three years into the euro zone debt crisis, which has clobbered orders and output.

Data released this week showed output slid by 1.8 per cent on the month in September, more than forecast and the sharpest drop since April. Industrial orders have fell 3.3 per cent month-on-month in September.

Economic advisers to the government - known as the "wise men" - said Germany's economy would probably hit a low-point this quarter and grow just 0.8 per cent this year and next, mirroring forecasts published by the European Commission on Wednesday.

"What's really worrying is the economic development next year," said adviser Lars Feld after the panel handed its annual report to Chancellor Angela Merkel. "The downside risks to our forecast look greater than the upside ones, given current data." Industry accounts for a third of German gross domestic product.

Other recent data has shown business sentiment worsening, the private sector contracting, joblessness rising and industrial orders falling at their sharpest rate in a year, though consumer morale has held up and exports have leapt.

"Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area. But the latest data suggest that these developments are now starting to affect the German economy," European Central Bank president Mario Draghi said at an industry event in Frankfurt on Wednesday.

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While Germany's economy long fended off the euro zone's troubles, expanding by 4.2 per cent in 2010 and 3 per cent last year, growth slowed to 0.3 per cent in the second quarter of this year from 0.5 per cent in the first and some economists expect a contraction in the fourth quarter.

"The euro zone crisis is hitting the domestic economy. German companies seem to be less and less inclined to invest and that points to the economy contracting in the fourth quarter," said Stefan Schilbe at HSBC Trinkaus.

"The German economy should regain some momentum in the course of 2013, largely due to an economic recovery beyond the euro zone, but in the coming months economic data is more likely to be disappointing," he added.

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The panel of advisers said that while Germany may have managed to consolidate its budget well this year, the darkening outlook means it cannot rely indefinitely on strong tax revenues and "special factors" such as low interest on debt.

It will also have to contend with rising spending in the future due to an ageing population, they said.

Wednesday's Economy Ministry data showed factories churned out 2.2 per cent fewer intermediate goods and 3.5 per cent fewer capital goods on a monthly basis in September, dragging overall output down. Activity in the construction sector, which rose by 2.7 per cent on the month, was the only bright spot.

The ministry said industrial production in the fourth quarter would be weighed down by weak order levels.

"With the various industrial survey indicators pointing to steeper falls in production ahead, Germany's growth engine is still sputtering, if not in reverse," said Jonathon Loynes, chief European economist at Capital Economics.

Industrial companies have taken a knock recently, with German steelmaker Salzgitter cutting its full-year outlook and Continental, Germany's biggest tyre maker, said it would scale back some production as Europe's debt crisis saps demand.

German industrial production has nonetheless fared much better than struggling euro zone peers such as Spain, where industrial output fell by 7 per cent on the year in September.

"In short, the German economy is stuttering but not (yet) plunging," said Carsten Brzeski, senior economist at ING.